Tag Archives: demonetisation

Voices for and against argument that there is an undeclared Emergency gets shriller every year

It is that time of the year — the last week of June — when the Emergency is remembered, various commentators lament the attempt to kill the spirit of the Constitution and others celebrate how the system fought back. Increasingly, the last week of June has also come to entail a discussion on a state of “undeclared Emergency”. The voices for and against the argument that there is an undeclared emergency gets shriller every year.
Some home truths are critical. First, no party in power is innocent of the charge of introducing elements of an “undeclared Emergency”. Be it the Congress-led United Progressive Alliance (UPA) or the Bharatiya Janata Party-led National Democratic Alliance (NDA), every successive government has contributed its share of draconian laws, subversion of Parliament, blasé violation of constitutional principles with law officers finding ingenious arguments to defend them in the courts. Each government builds on the foundation laid or fortified by the earlier government, regardless of political hue. Each Opposition screams against “undeclared Emergencies” and only builds on the foundation when voted into power.
Examples will make this point clear. The UPA effected draconian amendments to the law governing foreign contributions to the social sector that have resulted in foreign-funded non-government organisations (NGOs) being barred from indulging in an ambiguously-and-widely defined “political activity” even while foreign-funded business enterprises face no such restrictions. Corporates with foreign shareholding are free to lobby for changes to law and lobby Members of Parliament and senior bureaucrats, while NGOs with foreign donations simply cannot meet these worthies to influence their thinking and express their points of view. The administration during the NDA government built on this well-laid foundation and started actually knocking NGOs hard.
Likewise with interventions with media businesses or just crony capitalism. Bennett Coleman and Co, the owner of The Times of India, was hounded by the Enforcement Directorate during the United Front government comprising a bunch of 13-odd political parties led by Deve Gowda first and I K Gujral next, followed by the NDA. Tehelka and NDTV can write full primers on what can go wrong when you get on the wrong end of the state machinery. Tehelka’s substantial financier Shankar Sharma faced the music under both regimes — the NDA and the UPA (the allegations for which his broking firm had been punished in 2001 were levelled again to punish him personally, this time under the UPA). The Vedanta Group came in for serious stick under the UPA. Cairn India was forced to apply for approval for a change of ownership, and then given approval with the condition that substantive litigation against the government must be withdrawn.
Second, a government in power has to be really very stupid to formally use the E-word and declare a state of emergency. It can now do so only if it were to entirely lose all faith in the democratic system to come to believe that it would get away with it. Indira Gandhi’s declaration of Emergency fell in the former category. Her termination of the Emergency showed that she too had not lost faith entirely and by the time she realised her cronies had gone too far, it was really late. Today, with the love and glory for the armed forces being felt so widely, as a society we may be heading towards a tipping point towards the latter — a loss of faith in democratic politics. However, no politician who has a decent career would have the capacity to come out the closet and declare an Emergency by design.
The situation is much like the discourse and debate in Israel, where awareness of discrimination under Hitler’s Germany is always highlighted in the incessant debate over the “undeclared apartheid” against Palestinians. It would be stupid for Israel to embrace the epithet of “apartheid” and therefore, it would always highlight how apartheid in South Africa was different in vital features from the discrimination in Israel. Our social debate on “undeclared Emergency” is quite similar. One can keep pointing out that there is no official censor to review news reports, but others can point out that when the situation does not demand an official censor, you do not need to appoint one. The actions of the “Censor Board”, as the film certification board has come to be known, are adequate pointers to the social state.
Finally, as a society, Indians have always craved for a dictator they can elect. Ruthlessness has always been an admired trait in large sections of the Indian electorate and society. Indira Gandhi was popular in her day. The PM in office is as popular today. Their decisiveness and sense of direction is a matter of envy of the other politicians and pride for the layman. Therefore, it is not at all really necessary for a formal declaration of emergency. You can blame Indira’s indiscretion on being blinded by her cronies — astrologers and Sanjay Gandhi’s disjointed blokes and being cut off from ground realities. Let us remember that it was not the feeling of constitutional injury that led to her downfall right after Emergency — it was the forced nasbandi by population-control vigilantes that led to the disaffection of the masses. The government that succeeded her was as draconian — a simple example of trying to arrest a former PM without even a warrant should do to make the point. Morarji Desai had sought to put down the Maharashtra movement in the Bombay Presidency with a firm hand — directing firing on protestors.
Perhaps a more honest way to handle this debate is or all to acknowledge by saying, “We are like that only.”This column was published “Without Contempt” in the Business Standard edition dated June 29, 2017

Outcomes of elections cannot be a barometer of the wisdom of economic policy

By Somasekhar Sundaresan

An election result is upon us. India’s most populous state and her neighbour have emphatically voted the party in power at the Centre into government. Two tiny states have returned fractured verdicts and coalition governments led by the party in power at the Centre have been installed. The single-largest winner in these two states is having to sit in the Opposition. Another state elected the principal Opposition party to power.

The polls were seen as a referendum on whether demonetisation, announced in November, met with approval by the people of India. Shortcoming in psephology skills is now equated with shortcoming in appreciation of public policy. The outcome of the polls, it is widely believed — even among critics of demonetisation now mired in serious self-doubt — underlines that demonetisation was for the larger good and the common man could see what policy wonks failed to see.

Outcomes of elections cannot be a barometer of the wisdom of economic policy. The merits of public policy choices are quite different from the merits of assessing the capacity to sell evidently unpopular choices at the hustings. The latter is reflective of political acumen. The former requires the capacity to take hard decisions for the right reasons. The inability to gauge the intensity of anger of the man on the street is not the same as the inability to think clearly about what is good policy.

Demonetisation inflicted serious hardship on the common man. The costs it imposed evidently outweigh the benefits — mind you, computation costs and benefits can itself be quite controversial. The courts had refrained from restraining the government although judges are said to have expressed fear of riots on the streets. There were no serious riots despite acute hardship. The reasons that were said to have motivated the measure appear to have been belied — stashes of slush money in crisp newly printed Rs 2,000 notes are already being unearthed; counterfeit currency in crisp Rs 2,000 notes are being apprehended; and most of the corrupt rich seem to have tided over the crisis with some bearable cost being borne.

Demonetisation did not hurt the electoral prospects to the extent it would rationally have. Nor for that matter have laws that imposed a near-100 per cent tax on income. If winning elections were a relevant barometer of what constitutes good public policy, Indira Gandhi and the Congress’ consistent wins for decades would place all their measures in a great position — it is another matter that today they are being pilloried. Despite (or perhaps, thanks to) ridiculous tax rates, black money got built up. The narrative of electoral wins making policy immune from critique was a well-honed Indira Gandhi model. Opposition leaders saw her as Durga, commentators said she was “the only one wearing the pants in the Cabinet” and yet, India kept slipping in governance, and institutions kept getting weakened to stay “committed” to her approach to policy.

Perhaps, Uttar Pradesh politics’ dependence on cash led to demonetisation materially impacting the outcome. Count that among the benefits of demonetisation if it evenly impacted all in the fray. Perhaps, the choice of chief minister after the win is a pointer to what issues really mattered at the polls. Perhaps, demonetisation was an electoral side-issue — a reflection of the disconnect between commentators in the cities and the realities on the ground.

None of this can dilute the need for a clear-headed empirical approach to policymaking, with costs and benefits being weighed and a cogent case for a policy intervention being necessary. In the US and the UK, policy thinking is currently on the lines of having to remove more than one past regulatory measure if a new regulatory measure is sought to be introduced. Akin to “carbon offsets” where reduction in emissions of carbon dioxide or greenhouse gases in one process is necessary to enable initiating new emissions elsewhere, regulatory offsets are part of current policy-thinking in other parts of the world. Computing of costs and benefits to show that costs that would get imposed by a proposed regulatory measure is not only counterbalanced by the benefits from that measure but are also compensated for by the removal of costs imposed under past regulatory measures, is a controversial but integral part of governance.

Brushing all policy arguments about demonetisation aside with a people-have-spoken argument is a reminder of Nani Palkhivala’s favourite quip about how majority decisions need not be the right decisions. His favourite examples: Christ’s crucifixion, and of course, the quality of elected governments during most of his lifetime.

This column was published Without Contempt in the March 23, 2017 edition of Business Standard at: http://www.business-standard.com/article/opinion/don-t-mistake-good-psephology-for-good-policy-117032201432_1.html

If you can effect and defend the note ban, so can you take these measures

It has been by far the most disruptive structural change in the recent history of Indian economic policy. First, rendering illegal as much as 85 per cent of the floating currency stock, and then, also the currency that was not turned in, have been the government’s two “tough” calls. Much ink has been spilled over whether these were sensible moves and whether the objectives held out as the driving reasons have been met at all.

However, since the mood of the moment is to push for structural changes, no matter how risky they may be to popularity, this is the time to think about the next set of structural changes that could be pushed through. The government has demonstrated its proficiency in handling proposals that could have been fatal to popularity, by bringing to bear a combination of reductionist and simplistic logic and turning adversity into advantage.

More importantly, the appetite for swallowing structural changes that may cause pain has never been higher. Therefore, now is the time to move on some structural changes that are also backed by merit and reason, which should make them easier to achieve. If any of these sounds tough to carry out, remember, it cannot be tougher than demonetisation.

First, the role of our regulators, as currently structured, is crying for change. For example, the Reserve Bank of India as a regulator of banks can be divorced from its role as a central monetary authority. It is the latter that needs complete independence and autonomy; the former needs reform and clarity of thought. There is too much bundling of the regulatory objectives of ensuring good conduct by banks into the role of being a monetary authority, with a lack of clarity on which measure would address which objective.

Likewise, the Securities and Exchange Board of India inextricably interlinks the objective of regulating market conduct with that of prudential regulation. The former requires disciplining errant market players, the latter thinking on how to keep the market financially safe and how to ensure that intermediaries, who hold out promises to society, have the financial capacity to perform with intensity. The structure of the insurance regulator, or for that matter, the pension regulator, needs similar attention.

The very structure of the regulatory architecture needs attention. It is time to separate the functions of regulating players in the financial markets into one regulatory agency that would focus on prudential regulatory requirements. This regulator has to think and breathe issues relating to prudential norms applicable to market participants: what sort of net worth they must have, what capacities they must develop and nurture, what they must do to address risk to their own existence to keep the market safe, and the like. A separate regulatory agency must focus on abusive conduct by players in the market. It would have the task of taking disciplinary action for wrongdoing.

In short, the entire financial sector regulatory framework can be re-engineered and recast to end up with three agencies — the central bank, a prudential regulator and a conduct regulator. This is hardly an original idea — the United Kingdom has this structure. Demonetisation was not some original idea either. If that project can be achieved, so can this one, with far better outcomes.

Second, since our justice delivery system has been debilitated by a variety of state capacity issues, the small man does not get justice. There is too much focus on the speed of justice, with quality seen as being capable of compromise — a bit like not worrying about manuals of medical procedures when handling a large number of victims of disaster or war. Therefore, a Financial Redressal Agency, with its governance manned by representatives of the three regulators, can focus on redressing the grievances of smaller consumers of financial services. Today, a small complainant would be lucky if her letter with a tale of woe manages to get the attention of the governor or the chairman. If not, a computerised sarkari process deals with investor grievances in a robotic manner. A lot of this work is even outsourced by regulators.

Yet, regulators loathe ceding ground in this space, for the ability to call up senior officials of market intermediaries and direct them to address grievances gives them unstructured muscle power over market intermediaries. However, actually formal assured redressal of customer grievances is an activity that needs round-the-clock attention of a dedicated agency that can also build up intelligence of malpractices and abusive conduct detected when handling complaints, and providing that to the conduct regulator to take pre-emptive and curative steps. Focused collection of such intelligence would also expose organisations that adopt standard processes in abusive conduct across sectors. This would be a tough measure to implement, considering that opposition comes from the regulators themselves, but remember, it cannot be tougher than demonetisation.

Finally, in the Union Budget due shortly, the government must have the courage to waive or drastically reduce transaction costs for consumers using electronic payments. If one element of state policy pushes consumers to use electronic platforms and online payment systems, another must not impose a cost. The recent stand-off between banks and fuel stations was only a teaser; it can lead to a far bigger problem. If those providing payment platforms need to be compensated for their service, it would be a fit case for the government to transparently assess how they may be subsidised, if necessary, to keep the customer protected from becoming captive to ridiculous transaction costs. If demonetisation truly provides long-term aid to bring the economy into the banking system, there has to be payback and reward for consumers who “queued up with pride”. There can be no reward more appropriate.

This column was published in the Business Standard in the editions of January 19, 2017 titled Without Contempt

Never before has the national anthem been debated so much. Indian society is abuzz with arguments for and against the Supreme Court’s ruling that the national anthem must be played in every movie hall with the doors of the hall being shut to avoid insult to the forced rendition of the anthem. But this column will not add to the verbiage on the merits (or the lack of it) of the judgement.

Instead, the anthem judgement brings to the fore the human propensity to assume human reaction to legislative instruments. Every arm of the State – the legislature, the executive and the judiciary – is guilty of blundering with mis-reading outcomes. The merits of the objective sought to be achieved is often conflated and projected as the legitimately anticipated outcome.

The legislature (Parliament and State Assemblies that make law) as well as the executive (central and state governments that use delegated powers to make law) routinely mis-read potential outcomes when making law. Specificity in defining the objective is itself a tall ask. They rely primarily on intuition. The near absence of pre-legislative consultation makes matters worse. The measurement of intended outcomes is made difficult right from the time the law is written.

However, the judiciary, which legislates, particularly when dealing with public interest litigation, too makes the same mistakes, although limited pre-legislative consultation takes place. Any member of society can call upon the judiciary to write law, often citing the reluctance or failure of the legislature and the executive to work on solutions. Despite growing reluctance, a lot of law gets written in this space. The parties before the court air their views about the measures the court must adopt, and eventually un-elected judges make policy choices. The consultation may be only with those before the court who are interested in defining the problem and the solution, but yet, severe capacity constraints make it hard for judges to take measures that deliver intended outcomes.

To write law, one would need to hone the capacity to think through a defined problem statement, and then choose from competing policy choices to structure a solution. The comparison of competing potential legislative measures and weighing it against the potential benefits of each measure, is not a matter of judicial skill or training. It is a matter of administrative training and policy choice skill. However, in this department, all three arms of the Indian State can display quite a serious degree of inadequacy. Worse, without articulation of intended outcomes, the measurement of the efficacy of the law becomes highly suspect.

Take the example of the environmental entry charge imposed on vehicles entering the National Capital Region comprising Delhi and its surroundings. The stated objective of the law was to curb air pollution in Delhi. It was believed that a substantial chunk of the pollution came from vehicles. It was felt that imposing a charge on entry of vehicles into Delhi would create disincentives to ply via Delhi and thereby curb pollution. This was fully judge-made law that later came to be adopted by the executive formally. This year, Delhi has faced its worst air pollution crisis. The thick haze is attributed to multiple factors – this time newer factors are being guessed – ranging from burning of farmland waste to fireworks after the Diwali festival. No one wondered how the law imposing a charge on entry of vehicles into Delhi, fundamentally driven by the intended (if not promised) outcome of curbing air pollution had not met its stated objective.

The death penalty is an easy example in legislature-made law failing to deliver promised outcomes. When the gruesome Nirbhaya assault case was discovered in December 2012, people took to the streets demanding action. As is the wont, instead of looking at how to better enforce existing laws, we ended up writing new law – partly as a measure of placating the mob with the demand for law being satisfied and to ensure that the demand for bloodshed was made redundant. Definitions of sexual assault were changed. Punishment was bumped up to bring in the death penalty. In August 2013, the gruesome Shakti Mills sexual assault was discovered. No one wondered how the new law, fundamentally driven by the outcome of the crime, had not met its stated objective.

On the executive side, demonetization is the live and classic example of the stated objective being conflated into the potential outcome. If the seriousness of the purpose for which a law is proposed were adequate to justify any ineffective measure, there would be no need to debate the measure. If the need for spirit of patriotism were lofty enough, the law-maker would hope that there need be no debate on whether the measure is successful. Whether singing the anthem before a movie starts would achieve the outpouring of love for the nation would then become secondary. Whether black money would actually be curtailed by demonetization would become secondary. So long as it is intended to hurt black money, supporters of the measure would not want a debate on the efficacy of the measure. In much the same way, the efficacy of an entry charge on vehicles plying into Delhi, would ostensibly curtail air pollution in Delhi.

This column was published Without Contempt in the Business Standard edition dated December 7, 2016